Saturday, December 11, 2010

December 11 2010: The Debt-Dollar Discipline: Part II - Conservation & Release

Timothy H. O'Sullivan Contrabands November 1863
"Contrabands [runaway slaves]." The man on the right is "John Henry, servant, at headquarters, 3d Army Corps, Army of the Potomac." Main Eastern theater of war, General Meade, near Culpeper, Virginia

The DVD Is Out !!

Stoneleigh and Ilargi: Dear TAE readers,

The DVD version of Stoneleigh’s acclaimed lecture "A Century of Challenges" is now available by clicking the top button in our right hand side column. Production, handling and shipping is handled by CG Publishing in Burlington, Ontario, Canada. The sales of the DVD will go a long way towards funding The Automatic Earth in 2011.

We have had incredibly generous amounts of donations over the past year, and we truly are deeply and humbly grateful to all of our donors and supporters, but if we are to go where we want to be, we’ll need both more revenue and a more steady and reliable source of it.

Or look at it this way: in 2010 we're not doing a Christmas Fund Drive as such, but we offer you the DVD instead as a bonus for your donations.

So put lots of those DVD's under all of your families’ and friends’ Christmas trees, and give every single one of your dearest not some trinket or gadget, but something of real value!!

Happy holidays to you and yours,

Stoneleigh and Ilargi

Ilargi: This is part 2 of Ashvin Pandurangi's 3-part series The Debt-Dollar Discipline. Part 1 is here, part 3 will follow shortly.

Ashvin Pandurangi:

The Debt-Dollar Discipline: Part II - Conservation & Release

Part I in this series introduced Michel Foucault's theory of disciplinary society, laid out in his book Discipline and Punish, and the application of this analysis to the "debt-dollar discipline" formally imposed on global society by the Bretton Woods Agreement of 1945 (establishing the dollar as the global reserve currency). It should come as no surprise that this global financial discipline is currently in the process of being revoked.

This revocation is not carried out by the political or financial leaders of the world, but by the system itself. Part II will explore both the technical and practical aspects of disciplinary collapse, primarily in the context of complexity theory. Part III, to be released shortly, will conclude with some general thoughts on the potential forms of organization that could emerge from the ashes of debt-dollar discipline.

The Adaptive Cycle
Foucault did not say much about the future he envisioned for disciplinary society in his book, as it was geared towards promoting understanding rather than inspiring rebellion. He did, however, retain some hope that a better form of society could develop. [1]. Although he correctly identified the evolution of societal discipline with the evolution of economic structures, he was not in the business of predicting future economic developments.

Foucault's disciplinary system was a complex set of interacting networks, in which each central hub (households, schools, factories, prisons, etc.) served a necessary function. Although he described individuals moving from institution to institution in a somewhat linear path, he recognized that each institution was highly analogous to and reinforced the others. A system of such organization follows a natural evolutionary path. The debt-dollar discipline represents the tail end of this path, and the implications for disciplinary society at every level are extreme.

Most complex evolutionary systems, such as the global financial system, can be viewed in the framework of Buzz Holling's adaptive cycle, consisting of growth (exploitation), conservation, release and reorganization. An excellent primer on this topic and its relation to Robert Prechter's socionomics and Joseph Tainter's ideas on complex societies undergoing collapse can be found at The Automatic Earth [Fractal Adaptive Cycles in Natural and Human Systems].

The debt-dollar disciplinary system has been in a phase of extraordinary growth for the last few decades, exploiting markets and resources to increase inter-dependencies, systemic diversity and overall wealth. However, the high levels of growth and specialization also led the system into a phase of conservation, in which opportunities for novel exploitation diminished and systemic structures became rigid.

Increasing amounts of energy and resources were directed towards maintaining the existing system, rather than growth, and this maintenance was primarily achieved by core structures extracting large amounts of wealth from the periphery. The complex inter-dependencies, which previously functioned to generate wealth, became a major liability for the system, as it was less resilient to external or internal shocks. At this stage, Holling described the complex system as "an accident waiting to happen".

Financial Conservation
Foucault focused on the modern penal system, in part, to make it clear how the disciplinary society was able to maintain its power structures over time. It did not seek to eliminate undisciplined behavior, but simply manage such behavior on its own terms. In the wake of the industrial revolution and increasing wealth inequality, it was the property crimes committed by peasants that were most threatening to the status quo structures. These "popular illegalities" were ultimately what drove seemingly "humanitarian" goals of "prison reform".

By identifying, labeling, detaining and controlling lower class "delinquents" in a confined space, the state could also control the general socioeconomic conflicts that were increasingly common within industrial capitalist society. The lower segments of this society, who were absolutely necessary for the state's economic functioning, were coerced to self-discipline and fear the potential that they, too, may become a part of the largely invisible, yet detested "delinquent class". To maintain a high level of discipline, then, societal elements of popular dissent must be carefully managed, which presents an inherent conundrum for a financial system under debt-dollar discipline.

This system, unlike its strictly industrial predecessor, is endogenously prone to over-extension in the short-term. The large economic rents extracted by speculative financiers lead to severe debt deflations, which then leave significant segments of the underlying population in economic despair, including the industrial capitalists. The rapid growth enabled by financial discipline sparks a crisis of legitimacy, in which previously self-disciplined financial consumers begin to question the wisdom of their shackles. For the most part, this questioning is simply a result of there being no other option, as financial expectations and promises have evaporated as quickly as they were formed.

Before the global financial crisis of 2008, debt-dollar discipline was maintained by re-directing credit growth whenever a debt-induced recession occurred. Essentially, financial consumers would be disciplined (by the system and themselves) to leverage their stagnant real wealth into various different assets for temporary returns. There are currently no asset classes or greater fools left to pick up credit growth where it left off, save for government leaders around the world, who will stop at no lengths to preserve the debt-dollar discipline keeping them in power.

However, these governments are currently or will soon face sovereign debt crises, as a function of their own enslavement to the financial disciplinary system. They, too, must borrow money from private banks and pay interest on that debt, which becomes increasingly difficult as economic growth stagnates and tax revenues plummet. The "delinquent class" has now become too massive and visible for the existing power structures to effectively control, but that does not prevent the disciplinarians from trying.

Many of their attempts to reinstate debt-dollar discipline are failing because of the financial system's rigid structures themselves. As a function of conservation, these structures have become extremely inflexible and a liability for those seeking to maintain the status quo. The U.S. Federal Reserve has created trillions of debt-dollars through discounted loans and quantitative easing, in the alleged hopes that this "liquidity" will find its way to financial consumers and inflate the prices of assets and goods.

Their attempts are futile because economic actors worldwide had previously been disciplined to take on dollar-denominated debt, and as those massive liabilities come due, the demand for dollars will spike along with their value. It may seem counter-intuitive that a collapse in debt-dollar discipline will cause dollars to increase in value, but the disciplinary system has actually relied on a suppressed dollar to carry out its purpose. Without inflated asset prices relative to the dollar, debts cannot be repaid and financiers go broke.

Other attempts involve governments incurring fiscal deficits to provide subsidies, backstops and general support for the financiers. The U.S. policies of TARP, ARRA and Fannie/Freddie housing intervention are great examples of such attempts. It is hoped that financial discipline can be restored by propping up the institutions most responsible for implementing and reinforcing it. Once again, the reason this plan will not succeed is due to the financial system's original disciplinary purpose.

It had evolved to establish a global class of financial consumers who will continuously take on debt and repay most of those debts, in the form of debt-dollars or hard assets. The system has now limited its own ability to extract future wealth, as financial consumers have very limited capacity to repay existing debts, let alone incur new obligations. Much of the collateral secured by existing debts, or that could potentially be secured by future debt, has lost significant value, cannot be reached or is already encumbered.

These fiscal deficits will eventually lead the U.S., the purveyor of debt-dollar discipline, into a sovereign debt crisis. Attempts to decrease the national debt have been rendered useless by the financial disciplinary system, as it requires private or public credit growth for economic health. Without the underlying private growth, cuts in public spending will most likely make deficits worse and debt servicing costs greater (the current Euro zone crisis is an ongoing example of this dynamic).

President Obama's laughable plan to double U.S. exports in five years will not even come close to fruition, because debt-dollar discipline has come at the expense of the country's manufacturing sector, and the ability to suppress the dollar's value as explained earlier. The complex disciplinary system has also rendered the political apparatus inflexible, which is why many Democrats, claiming to be against tax cuts for the rich, and Republicans, claiming to be against public deficits, have both agreed to extend Bush's tax cuts (which will cost taxpayers $5T over ten years [2]). It is truly a predicament, an inherent contradiction of the system itself, and can only be resolved by a wholesale simplification of the structures within global disciplinary society.

Comprehensive Release
For reasons stated above and others, the financial disciplinary system has entered a phase of irreversible release. The sub-prime housing crisis in the U.S. was the triggering event for this global release, in which the complex power structures supporting debt-dollar discipline will be rapidly and chaotically dismantled. Without pervasive access to affordable credit, the vast networks of discipline around the world cannot be coherently maintained (i.e. international trade heavily dependent on "letters of credit"). This credit had become the lubricant enabling Foucault's disciplinary machine to operate smoothly, and without it, the machine will grind to a screeching halt.

In Part I of this series, the financial disciplinary system was referred to as a parasite, which attaches itself to all other disciplinary institutions of society and feeds off of their established functions. In turn, the disciplines legitimizing these institutions become hopelessly intertwined with the debt-dollar discipline, as the latter has come to define the relative "success" of a society. Systems of education, healthcare, industrial production (including agribusiness) and law enforcement have become mal-adapted to prolonged periods of economic deleveraging and contraction. These foundational systems will be unable to perform their disciplinary functions when they lack sufficient resources, price their customers out and are perceived as being irretrievably damaged.

For example, 41 percent of American adults reported that they "had medical debt or trouble paying medical bills" in 2007 [3], and debt owed by American students graduating from a public college has increased more than 100% over the last decade. [4]. It was reported that the Illinois State Police was planning on laying off more than 460 troopers and closing five regional headquarters by Fall 2010 [5], which is an ongoing trend in many U.S. and European localities.

The U.S. passed a $26 billion spending bill in August 2010 to prevent about 160,000 teacher layoffs [6], but teachers continue to lose their jobs and the ones saved will surely disappear as soon as the money runs out [7]. Disciplinary institutions are classically "caught between a rock and a hard place", leaving them with almost no options to preserve their current functions. Perhaps the institution most visibly affected by disciplinary collapse has been the political apparatus of the U.S., which has lost much of its legitimacy in recent years.

The emergence of the "Tea Party" movement in America is an obvious example of the government's disciplinary policies being popularly rebuked. However, this movement has arguably been co-opted by the mainstream power structures (Republican Party) and, in the spirit of Foucauldian punishment, many elements of the movement are labeled as "extremist" or "racist" by politicians and the corporate media. Whether there is any truth to those claims is irrelevant, as long as they serve to marginalize the rebellious ideas lurking within. Nevertheless, the disciplinarians are having a difficult time containing the popularity of the subversive concepts represented by the Tea Party movement.

Another recent, existential threat to disciplinary society is the WikiLeaks organization, co-founded by Julian Assange. For many years, the various disciplines (especially debt-dollar discipline) have greatly benefited from advances in electronic communications technology, and have evolved right alongside them. Now, this technology increasingly serves as a means of communicating outside the panoptic gaze of disciplinary society.

WikiLeaks has released numerous electronic documents given to it by informants within the heart of the system, exposing some inconvenient truths about those directing foreign and domestic policies. [8]. These documents are especially threatening to disciplinarians because they are "raw dumps" of data and communications, at least before they are "vetted" and deceptively reported on by the mainstream corporate media. The leaks provide the disciplined public a rare glimpse into the "dark side" of the modern "democratic" state and its complex power structures.

Governments and many parts of the corporate media have obviously responded by attempting to marginalize the effects of such leaks, primarily by labeling Assange a "child molester", cyber-attacking the WikiLeaks website, restricting its access to funding and threatening criminal prosecution. Perhaps more importantly, they have attempted to frame the narrative surrounding WikiLeaks as one involving unpatriotic acts of disclosure, which may actually harm the lives of American citizens. If the truth becomes known, then we will be more susceptible to external threats and less secure.

This is a recurring narrative that has been heavily used by the disciplinarians to marginalize political threats (i.e. Daniel Ellsberg - released Pentagon Papers during Vietnam War) and reinforce discipline (i.e. Patriot Act), especially since the attacks on 9/11. However, the momentum of release, fueled by a break down in financial discipline, is currently overwhelming their suppressive efforts. International hacker groups have recently launched web attacks against PayPal, MasterCard and Visa in response to these companies cutting their payment services to WikiLeaks. [9], [10]. The WikiLeaks organization itself has released an "insurance file" into cyberspace containing many more revealing documents, which can be decrypted and exposed should it be deemed necessary, and rest assured it will be soon enough.

A claim circulating in the blogosphere that deserves a quick mention is that WikiLeaks is actually a covert psychological operation by the U.S. government to further reinforce discipline, primarily with regards to the "war on terror". [11]. It is claimed that much of the leaked information does not really criticize the overall justifications and motives of U.S. foreign policy (or economic policy), and rather focuses more on the corruption and deceit of other "hostile" countries. For example, the leaked diplomatic cables simply present slightly embarrassing, but well-known facts about U.S. policies, while providing the disciplinarians even more justifications to engage in military operations against Iran (diplomats alleging it has nuclear weapons).

I tend to disagree with this viewpoint and see much of the WikiLeaks activity as being more than "slightly embarrassing" to U.S. power structures (especially given their responses), but instead of sidetracking into that debate, I will simply quote an excellent article written by Andrew Gavin Marshall on the Global Research website:
"If Wikileaks is a psy-op, it is either the stupidest or most intelligent psychological operation ever undertaken. But one thing is for sure: systems and structures of power are in the process of being exposed to a much wider audience than ever before. The question for the alternative media and critical researchers, alike, is what will they do with this information and this opportunity?"[12]

The financial structures of power are also under attack by some of the financial consumers themselves, who have decided not to buy into the fabled narratives espoused by their politicians and pundits. Europe had an obviously unofficial "bank run holiday" on December 7th, in which large numbers of people withdrew their deposits. This episode arguably led to a temporary crash in the ATM systems of the Bank of Ireland, the country's largest financial institution. [13].

Max Keiser and Mike Krieger also recently launched an operation to decapitalize J.P. Morgan by encouraging consumers around the world to buy an ounce of physical silver, forcing the institution to cover massive losses on its silver short positions. November saw record sales of silver American Eagle coins from the U.S. Mint, and this surge could very well have been influenced by the operation. [14]. The immediate success or failure of these "attacks" is largely irrelevant at this point, because it is literally the thought that counts.

The U.S. disciplinary order has also lost legitimacy in the eyes of many other nations, who previously were coerced to support the system. It was mentioned above that the value of the dollar will most likely increase in the short-term, precluding the disciplinarian's attempts at restarting credit inflation, but this process is by no means a vote of confidence in the dollar as a long-term store of wealth. It is a necessary function of global deleveraging, as the dollar still provides the best means of eliminating debts and transforming paper wealth into hard assets, but this window of opportunity is rapidly narrowing. Many countries have made clear that they are no longer willing or able to submit to debt-dollar hegemony in the near future.

The Federal Reserve's latest round of quantitative easing was ubiquitously rebuked by officials in Europe, Asia and Latin America. Brazil's finance minister has blatantly stated that "it does no good at all to just throw [debt] dollars from a helicopter". [15]. These states are simply attempting to maintain their own disciplinary mechanisms by separating out from the overarching debt-dollar discipline. They sense that structures preserving the latter are naturally collapsing, and a pre-emptive break provides their best chance to maintain a degree of national or regional order.

Russia and China recently announced that they would stop using the dollar to settle bilateral transactions, and instead use the yuan and ruble. [16]. Germany consistently expresses its disdain for the IMF and ECB's euro zone bailout facilities, which ultimately serve to prop up financial institutions operating in Europe. [17]. Numerous countries have also been engaged in ongoing discussions with the IMF about establishing a new reserve currency, and though this is unlikely to occur, it is symbolic of the debt-dollar discipline's demise.

Foucault perceived the disciplinary society exerting its power primarily by fixing "docile bodies" within time and space. [18]. These bodies would spend much of their lives in a highly regimented and confined existence, disciplining themselves to become "normally" functioning members of society. Debt-dollar discipline has not strictly operated through such physical requirements, but rather a pervasive psychosocial drive of consumers to extract ever-greater amounts of wealth from their environment.

As the complex structures supporting this financial discipline deteriorate, consumers will have to confront a profound new reality, one that they previously thought to be outside the realm of possibility. They must not only confront the fact that they have been deceptively enslaved, but simultaneously impoverished as well. Part III of this series will discuss the general ways in which financial power structures and disciplined consumers may react to the new realities faced by global society, introducing the insightful thoughts of Gilles Deleuze on what he ominously termed the "control society".

An Irishman abroad tells it like it is !

U.S. Home Values to Drop by $1.7 Trillion This Year, $9 Trillion Since 2006
by Hui-yong Yu and John Gittelsohn - Bloomberg

U.S. home values are poised to drop by more than $1.7 trillion this year amid rising foreclosures and the expiration of homebuyer tax credits, said Zillow Inc., a closely held provider of home price data.

This year’s estimated decline, more than the $1.05 trillion drop in 2009, brings the loss since the June 2006 home-price peak to $9 trillion, the Seattle-based company said today in a statement. “It’s definitely going to continue into 2011,” Stan Humphries, Zillow’s chief economist, said in an interview on Bloomberg Television today. “The back half of 2010 looked horrible and 2011 should look like the mirror image of that.”

The drop in home values pushed more buyers underwater, meaning they owe more on their mortgages than their homes are worth, Zillow said. The percentage of homeowners with mortgages with so-called negative equity reached 23.2 percent in the third quarter, up from 21.8 percent at the end of 2009.

Housing demand has slumped since the start of the year as the government tax credit expired and unemployment hovers near 10 percent. Sales of existing homes in October fell to an annual pace of 4.43 million, compared with 5.98 million a year earlier and an annual average of 5.81 million over the past decade, the National Association of Realtors said Nov. 23. The median price was $170,500, down from $172,000 a year earlier.

Prices are likely to stop falling in the second half of next year and take another three to five years before making strong gains, he said. “We think appreciation will be after 2014, essentially,” Humphries said.

More than $1 trillion of this year’s decline in home values occurred in the second half, Zillow said. Federal tax credits of as much as $8,000 for qualified first-time homebuyers and $6,500 for repeat buyers required a sales contract by April 30. Only 31 metropolitan areas, or fewer than one-fourth of the 129 tracked by Zillow, had gains in home values this year. They include Boston and San Diego.

Zillow’s findings contrast with reports by the Federal Housing Finance Agency, the S&P/Case-Shiller index and the National Association of Realtors, which show home prices found a floor in early 2009, said Walter Molony, a spokesman for the Realtors group. “We are projecting essentially no change in values from 2009 and view Zillow’s estimates as completely wrong,” he said in an e-mail.

Weak Demand
U.S. home prices will decline as much as 11 percent by 2012 as weak demand and rising inventory extend the housing slump, Morgan Stanley said in a report yesterday. Prices will be as much as 36 percent below their 2006 peak before finding a bottom, Morgan Stanley analysts led by Oliver Chang wrote. Sales will stay “depressed” through next year amid tightened lending standards, they said.

As many as 8 million homes are in some stage of default or foreclosure, known as shadow inventory, and may be offered for sale over the next five years, according to Morgan Stanley. The looming supply will combine with tight credit and questions about housing-finance regulation to reduce prices 6 percent to 11 percent from current levels, the analysts said.

A Snapshot of Americans' Wealth
by AP

Americans' wealth, or net worth, is the value of assets such as homes, checking accounts and investments, minus debt such as mortgages and credit cards. The Federal Reserve provides a snapshot each quarter. Net worth grew to nearly $55 trillion in the third quarter, a 2.2 percent rise from the prior three months. Here are some of the parts on the asset side of the ledger.
  • Real estate holdings account for 30 percent of net worth.

  • Individual stocks make up 14 percent of net worth.

  • Mutual fund shares make up 8 percent of net worth.

  • Bank accounts, checking accounts and other savings products make up nearly 14 percent of net worth.

  • The balance includes retirement accounts, bonds and possessions such as cars and jewelry.

CBO Has Started Weighing The Benefits Of Bankruptcy Or Default For Local Governments
by Gus Lubin - Business Insider

The Congressional Budget Office has a note out today warning of the fiscal stress faced by local government. The chart on right shows how much revenues are down -- with more stress is expected as home prices decline.


The ten-page brief includes a long discussion on bankruptcy versus default. The CBO seems to prefer:

One key advantage of bankruptcy is the “automatic stay,” which is issued by a court and prevents creditors from taking action against the municipality and its officials without approval from the court...

Another important advantage of bankruptcy is that courts can implement a restructuring plan without the consent of every creditor...

The bankruptcy process may also allow a municipal government to reduce its labor costs by facilitating the consent of employee unions to changes in labor contracts....

Formal discussion by the CBO suggests these options could become a reality.

So far states and cities have avoided bankruptcy or default, with Michigan rejecting bankruptcy applications from the City of Hamtramck. But just in Michigan, Gov-elect Rick Snyder says hundreds of cities face bankruptcy soon.

Jim Rogers: 'Britain is totally insolvent'
by Andrew Oxlade -

US speculator Jim Rogers is known for his outspoken views but today went further than usual suggesting Britain is 'totally insolvent'. In an interview on business TV channel CNBC, Rogers, who made his name making millions while partnered with legendary financier George Soros, suggested Britain was the true sick man of Europe.

He said: 'Greece is insolvent, Portugal has a liquidity problem, Spain has a liquidity problem, Belgium has been cooking the books for a long time, Italy has been cooking the books for a long time and the UK is totally insolvent.'

Rogers, who has repeatedly warned that inflation and commodity prices will race ahead in coming years, was being interviewed about the next stage of the European debt crisis. So far Greece and Ireland, with bond markets indicating their fears that the governments will not repay debts, have had to ask for bailouts from the European Union. Debts in Spain are far lower but rising rapidly, sparking concerns that it, as the euro zone's fourth largest economy, may also run into trouble.

Rogers said: 'You need to let Ireland go bankrupt. They are bankrupt, why should innocent Germans, Poles or anybody pay for mistakes made by Irish politicians and banks.' Rogers has been criticised for making attention-grabbing remarks. But his views are not entirely without basis. While debt owed by the British government is less, relatively, than the amounts faced by Ireland, Greece or Japan, the UK's debts in total are 466% of annual economic output once consumer debt is included. That's second only to Japan.

Britain has so far escaped the wrath of bond markets, partly because it is has particularly long dates on its gilts, reducing the need to keep asking for more money, but also because of the belief that the large and efficient British economy will deliver strong growth that will produce rising tax receipts to pay of government debt and rising incomes to pay off consumer debt.

But Rogers has previously raised conerns that with North Sea oil nearing the end of its useful life, Britain has 'nothing left to sell'. Rogers will also find sympathy for his opposition to quantitative easing. He believes the Federal Reserve's latest $600bn programme will stoke inflation and create financial misery for millions.

'It's dumbfounding and stupefying to me that you have a central bank in the United States that thinks that all it needs to do is print money,' he said. That has never worked, never worked anywhere in the world in the long-term or the medium-term.'

Tax Cut Bill: White House, Lawmakers Reach New Compromise
by David Espo - AP

The White House and key lawmakers cleared the way Thursday night for swift Senate action to avert a Jan. 1 spike in income taxes for nearly all Americans, agreeing to extend breaks for ethanol and other forms of alternative energy as part of the deal. Tax provisions aimed at increasing production of hybrid automobiles, biodiesel fuel, energy-efficient homes, coal and energy-efficient household appliances would be extended through the end of 2011 under the bill.

Debate on the expanded measure began almost immediately. While there is no precise timetable for passage, a test vote was set for Monday afternoon that appears likely to demonstrate overwhelmingly support for the legislation, which supporters say would help accelerate a sluggish recovery from recession.

The events unfolded as the White House predicted that the agreement between President Barack Obama and top Republicans would clear by year's end – even though House Democrats voted Thursday not to allow it to reach the floor without changes to scale back tax relief for the rich. "If it's take it or leave it, we'll leave it," said Rep. Lloyd Doggett, D-Texas, after a closed-door meeting in which rank-and-file Democrats chanted, "Just say no." "The deal will get passed," said presidential press secretary Robert Gibbs. There were no predictions to the contrary among senior Democrats on either side of the Capitol.

As announced by Obama on Monday, the deal would extend tax breaks at all income levels that are due to expire on Jan. 1, renew a program of jobless benefits for the long-term unemployed that is due to lapse within days and implement a one-year cut in Social Security taxes. At the insistence of Republicans, it also includes a more generous estate tax provision. That, in turn, infuriated Democrats already unhappy with Obama for agreeing to extend personal tax cuts at incomes over $200,000 for individuals and $250,000 for couples.

The two-year cost of the plan, estimated at about $850 billion, would further swell record federal deficits. Despite significant criticism from fellow Democrats, Obama has said the sweeping measure is necessary to help the struggling economy recover from the worst recession in decades. With unemployment at 9.8 percent, a top White House official warned Democratic critics Tuesday they risk sending the economy back into recession if they block the measure. In the Senate, the emergence of bipartisan legislation also indicated progress for the White House and Senate Majority Leader Harry Reid, D-Nev., toward possible year-end passage of other major items on their agenda.

Obama has made ratification of a new arms control treaty with Russia a top priority. The White House is also pressing Reid to try once more to end the Pentagon's 17-year ban on openly gay members of the military. Republicans have vowed to block action on all legislation until a tax bill and a year-end government spending bill have been resolved. Senate Republican leader Mitch McConnell has said he expects most of his rank and file to support the huge tax bill. Prominent House Republicans back it, too, although they have generally refrained from speaking out at a time when doing so would divert attention from the spectacle of Obama at odds with lawmakers of his own party.

Rep. John Boehner of Ohio, in line to become House speaker when Republicans take power in January, "supports the framework as agreed to by" Obama and McConnell and spoke with the president about it over the weekend, a spokesman said Thursday. Rep. Paul Ryan of Wisconsin, whose views on economic issues are influential among House Republicans, also swung behind it. "While I have concerns with some specific aspects of the plan, I support the proposed framework to avert further economic hardship and provide a first step to restore the foundations for sustained growth and job creation," he said in an interview.

Among the energy tax provisions added was an extension of the current 45-cent per gallon subsidy for ethanol, at a cost to the Treasury estimated at nearly $5 billion. The issue is of particular interest to lawmakers from Midwestern states with grain crops. The changes did nothing to ease the opposition among some critics, though. Liberal Sen. Bernie Sanders, I-Vt., attacked the measure's tax breaks for the wealthy as a threat to the middle class. The energy-related tax provisions will presumably increase support for the measure in the House, officials said Democrats there are eager to see a scaling back of a provision that would allow estates as large as $5 million escape taxation.

Speaker Nancy Pelosi, D-Calif., said, "That was a bridge too far for many of our members" already upset about Obama's decision to bow to Republican demands for extending tax cuts on individuals making over $200,000 and couples earning more than $250,000. Under the estate tax provision, the first $5 million of a couple's estate could pass to heirs without taxation, and an additional $5 million for the spouse. The balance would be subject to a 35 percent tax rate.

According to a Tax Policy Center estimate based on census data, that would mean only about 3,500 estates would be liable for taxes in 2011, out of more than 2.5 million forecast to be filed. Barring legislation, about 44,000 estates would be subjected to taxation in 2011, the groups said. Some Democratic officials suggested a relatively minor change to the estate tax portion of the Obama-GOP deal might assuage critics of the plan. If accepted, however, it could come at a price in the form of additional concessions to Republicans, several officials said.

Vice President Joe Biden has told Democrats in closed-door meetings this week that they are free to oppose the agreement but it might unravel if they do, according to officials familiar with the discussions. Whatever the disagreement over the economic wisdom of renewing tax cuts for the wealthy, the legislation also marks the emergence of a new era of divided government following midterm elections in which the Republicans won power in the House and gained seats in the Senate.

Privately, several House Democrats complained that the White House had not consulted them while negotiating a deal with McConnell. The House passed a measure last week that would have let the tax cuts lapse at higher incomes, but Senate Republicans blocked it on Saturday – with the knowledge the president had already agreed he was ready to sign a measure that was more to their liking.

Democrats and Republicans have spent two years gridlocked over the question of extending the expiring tax cuts, and Obama has characterized his compromise with Republicans as a temporary, two-year concession on a policy he opposes. House and Senate Democrats debated privately in the weeks before the elections whether to hold votes on the issue. They decided not to at that time after lawmakers who were seeking re-election said they would prefer not to have go on record if it meant Republicans would attack them for raising taxes on small businesses.

Estate tax plan would benefit wealthy even more
by Zachary A. Goldfarb - Washington Post

One part of the tax deal between President Obama and congressional Republicans stands out because it would make the tax code even more generous to the wealthy than it was during the Bush era: the estate tax. The focus of the debate between Obama and Republicans in recent weeks centered on whether to extend the Bush income tax cuts for the wealthy in addition to the middle class. Republicans won not only on that measure, but also on a proposal to reduce taxes on estates.

Under the proposal, individuals would be able to pass on $5 million in assets tax-free to their heirs. Above that, estates would be taxed at a top rate of 35 percent. The tax would affect the estates of people who die in 2011 and 2012 and a small portion of those who die or have died this year. The measure expires at the end of 2012. Democrats favor a less generous approach. They want to resurrect the 2009 estate tax, which carried a $3.5 million exemption and a top rate of 45 percent. Senate Democrats are now reluctantly supportive of Obama's proposal. But House Democrats are mulling an effort to scale it down, congressional aides say.

There is no estate tax on the books for this year. The Bush administration began phasing out the tax in 2001 - a step long favored by Republicans, who called it a "death tax." This year, it finally disappeared. With the growing federal deficit, many analysts on both sides of the aisle agree that the estate tax's complete elimination is unlikely. The nonprofit Tax Policy Center estimates that the tax generated $14 billion in revenue in 2009.

The lack of an estate tax this year has already benefited the heirs of at least two billionaires, including oil tycoon Dan L. Duncan, whose estimated net worth was $9 billion, and Yankees owner George Steinbrenner, whose estimated worth was $1.15 billion. In the unlikely scenario that Congress is unable to pass a deal, the estate tax would rise sharply next year. Current law sets a 2011 tax of 55 percent on estates worth more than $1 million.

Relatively few tax filers would be affected by the estate tax under the proposed deal - just 3,600, according to the Tax Policy Center. They would pay a total of $11.3 billion in estate taxes. Under the estate tax preferred by many Democrats, 6,500 estates would be taxed, raising $18 billion for the government. A who's who of progressive organizations, including key labor unions, blitzed lawmakers with letters this week arguing against the more generous estate tax.

White House press secretary Robert Gibbs said that Obama doesn't favor the more generous estate tax but that it was necessary to seal a deal with the GOP. "That's something the president is no big fan of," Gibbs said at a briefing this week. "This is a game of calculus and physics." The proposed tax deal includes a host of other measures favored by Democrats, such as an extension of unemployment benefits.

Leonard E. Burman, a tax policy expert at Syracuse University, argues that expanding the estate tax to benefit the wealthy even more is fundamentally unfair given the fact that lower- and middle-class Americans have seen their wages stagnate for decades. "The people at the very, very top have made enormous gains," he said. "Now we're saying, you've ridden this huge wave of economic inequality and now we're going to let you pass even more of your wealth to your heirs without paying any taxes."

Alan Viard, a scholar at the American Enterprise Institute, disagrees. "You're penalizing someone who has saved throughout their life and accumulated assets rather than someone who has spent time consuming," he said. The tax deal has a few other quirks that families should understand for tax planning, estate lawyers say.

First, heirs who otherwise were exempt from the estate tax this year are eligible to pay the 2011 estate tax if they choose. That could make sense because it would set the cost basis of any assets inherited to their value on the date of death. Otherwise, heirs, when they choose to sell those assets, would ultimately have to pay taxes based on their original purchase price.

Second, for the next two years, an individual can give as much as $5 million in assets to heirs without paying a gift tax. "You have to die to take advantage of the estate tax, but with the gift tax you can do it right away without paying any taxes," said Jonathan G. Blattmachr, a longtime estate lawyer.

Banana Republic Finance: Why Keynes Is Rolling in His Grave
by David Stockman - Minyanville

Events of the last few days show the US is on an accelerating descent into banana republic finance. First, the siren song that the cure for debt is more debt was given another stanza by the nation’s chief money printer on 60 Minutes Sunday night. Then, on Monday evening, the nation’s capitulator-in-chief made a deal with Congressional Republicans to light up a trillion dollar budgetary Christmas tree.

Moreover, in throwing the deficit financing spigot wide open on the back of Ben Bernanke’s promise to continue monetizing all the new debt Washington might create, the tax plan negotiators booby-trapped the nation’s budget with the expiration of several hundred billion of tax-cut goodies on election eve in 2012. So after the next predictable exercise in rinse and repeat, the true cost of Monday night’s plan will be in the multi-trillions.

In this context, it's useful to recall the classic traits of banana republic finance. These include massive and chronic government debt issuance; reckless monetary expansion to absorb it; and pervasive economic distortions that cause an uphill flow of income and wealth to the top of the economic ladder. The Obama White House’s latest act of fiscal desperation accomplishes all three.

First, this renewable feast of Chamber of Commerce Keynesianism -- there is no other term to describe it -- will prolong the current $1.3 trillion federal deficit as far as the eye can see. For the moment, the Fed’s QE2 program is arguably keeping interest rates down via the purchase of $100 billion per month of existing Treasury paper to offset the $100 billion in new debt being issued by Uncle Sam to fund this perpetual monthly shortfall.

However, will Helicopter Ben allow the global Treasuries market to go “cold turkey” when the Fed’s $600 billion QE2 bond-buying bucket is exhausted in a few months? That would mean permitting the old-fashioned forces of supply and demand to engage in “price discovery” -- potentially uncovering far higher interest rates to induce the People’s Dollar Store of China, the Gulf oil states’ spare change accounts, hedge fund punters domiciled on the Isle of Man and the like to start buying the $100 billion per month in new debt now being absorbed by the Fed.

The fact is, however, any sustained rise in Treasury yields (and drop in bond prices) would cause massive losses on the $3 trillion to $4 trillion of longer-term GSE and Treasury paper already owned by the Fed and its still-crippled wards in the commercial banking system. So it's a sure bet that to avoid this unthinkable eventuality, the Fed will implement QE3 by next spring. Stated differently, by standing ready to buy federal debt hand-over-fist (i.e. monetize it) to keep interest rates down in the face of an unending cascade of “stimulus” borrowing, the Fed has become -- like central banks in actual banana republics -- a branch office of the Treasury Department.

Most antediluvian proponents of sound money find this development alarming. They contend, correctly, that sooner or later the resulting massive leakage of unwanted dollars into the global financial system will unleash a destructive plunge into beggar-thy-neighbor monetary protectionism and trade autarky.

But even left-wingers like Congressman John Conyers, who haven’t even read their Hayek, are loudly complaining that this won’t end well! That’s because it’s not hard to see that continued money printing to fund unaffordable tax cuts will bury the nation’s middle class and poor anyway.

Indeed, inner circle money printers, such as Goldman Sachs alumni William Dudley, who runs the New York Fed, have already publicly acknowledged that the transmission mechanism for monetary policy is now the global risk asset markets, not the traditional domestic banking system. Consequently, as a matter of design, the Fed is stimulating not loans to Main Street, but global commodity prices and the short-term trading values of equities, corporate credit, and all manner of derivative risks.

Not surprisingly, since mid-summer (before word of the current round of QE2 leaked out) the price of cotton is up 85%, sugar 75%, wheat 50%, copper 40%, and heating oil 20%. That’s not “core inflation” as the Fed measures it, of course, but it's most assuredly swelling the cost of living on Main Street.

And that’s why almost every aspect of the Obama/Republican tax giveaway plan is so perverse. The two-year extension of the 15% capital gains tax rates, for example, will shield the winnings of speculators in risk assets like copper futures and Netflix call options, but won’t do much to incentivize real supply-side inventors and entrepreneurs. Unlike speculations in the nation’s financial casinos, their creations almost always take more than 24 months to mature.

On the other side of the ledger, there are 35 million jobs in sectors like bars, restaurants, retail sales, housekeeping and the like where pay averages less than $20,000 per year. Here the 2% payroll tax abatement will amount to $400 -- a sum that won’t begin to cover the cost-of-living surge fueled by the Fed’s money printing campaign.

Indeed, the White House claim that the plan is mostly “progressive” and that the two-year extension of tax cuts for the rich is the price of poker is pure spin. In fact, the bottom 50% of households will get nothing from the income tax cuts and perhaps $100 billion from the one-year extension of unemployment benefits and payroll tax relief. The next 48% of middle class households will get upwards of $500 billion from the two-year extension of the Bush rate cuts, the AMT patch, tuition tax credits and the like. And the top 2% will get the rest -- perhaps $200 billion from lower rates on income, dividends, capital gains, and estates.

We have had a 30-year referendum on federal spending, starting with President Reagan’s failed effort to shrink the welfare state in 1981 and culminating in the Bush-era ratification of all the spending that was there -- plus a healthy add-on for education and Medicare drug benefits. So why relieve the middle class of the obligation to pay for the government it apparently wants at the cost of showering the rich with tax cuts paid for by Uncle Sam’s credit card?

Obviously, it's all about short-term fiscal stimulus, and that’s the ultimate irony. The classic Keynesian cure assumed a normal business cycle had been interrupted by a sharp credit contraction and liquidation of business inventories -- conditions under which government deficit-fueled demand might restart the engines of economic expansion. But the collapse in September 2008 came at the end of a massive speculative bubble in housing, consumer credit, commercial real estate, and financial assets, not a legitimate business expansion.

Now, the artificially bloated levels of income and consumer spending that resulted from eight years of Republican deficit finance and money printing have evaporated, and can’t be recreated by more of the same. In the context of a pervasive debt deflation, deficit-financed tax cuts and Federal Reserve money printing to pay the government’s bills are having the perverse effect of fueling financial speculation, not economic growth.

In the end, income and wealth is being driven to the top of the economic ladder, while Main Street is being punished with soaring living costs and anemic returns on bank account savings. Since Keynes despised the rich above all else, he is undoubtedly rolling in his grave in reaction to the Obama/Republican tax giveaway that is been implemented in his name.

China raises bank reserve requirements
by Geoff Dyer - Financial Times

China has again raised the amount of reserves that commercial banks must keep with the central bank after the economy recorded another large trade surplus last month and exports and imports both grew strongly. The central bank’s move on Friday to lift reserve requirements by 50 basis points was the sixth time this year that it has used this policy tool to drain liquidity from the financial system in an effort to slow the economy.

The latest tightening move came after trade figures heightened concerns that the economy could be at risk of overheating. Exports grew 34.9 per cent in November over the same month a year earlier, much quicker than forecast and potentially a sign of rising demand from developed economies. In October, exports rose 22.9 per cent. Imports to China also beat forecasts, growing 37.7 per cent over the previous year, compared with a 25.3 per cent rise in October.

The trade surplus was $22.9bn in November, down from the $27.15bn registered in October, but ahead of forecasts and still one of the biggest recorded. The strong surge in exports and large surplus come amid continued international pressure on China to allow its currency to appreciate more quickly, especially as the renminbi has been becoming weaker against a basket of its main trading partners’ currencies in recent weeks, economists said.

Brian Jackson, at RBC Capital Markets in Hong Kong, said: “It is increasingly difficult to argue that China’s export sector cannot tolerate some currency appreciation, a move which would also help Beijing get price pressures under control. “The strength of domestic demand also suggests that rate hikes are needed to keep China’s economy on an even keel.”

Last week, China’s State Council formally changed the description of monetary policy from “moderately loose” to “prudent” over the next year. Interest rates have been increased once already and there had been widespread speculation that rates would be raised again on Friday. Inflation in October jumped to 4.4 per cent, well above the government’s 3 per cent target.

However, some economists believe that China has been too slow to tighten policy and control inflation, which could be made worse by the surprising strength in exports. Yu Song and Helen Qiao at Goldman Sachs said: “Note that exceedingly strong exports growth amid an already overheated domestic economy is not good news as it adds to the overheating pressures which will require the government to take even more stringent measures to bring down inflation.” However, house price inflation, a worry earlier in the year, continues to fall.

Merkel, Sarkozy Repeat 'Total Determination' to Defend Euro
by Geoffrey T. Smith and William Horobin - Wall Street Journal

French President Nicolas Sarkozy and German Chancellor Angela Merkel repeated their "total" commitment to defending the euro and the region's financial stability. "Our determination is total," Mr. Sarkozy told a joint press conference halfway through a meeting of most of the French and German cabinets on Friday.

Ms. Merkel, in turn, recalled a declaration by euro-zone governments in February, during the Greek debt crisis, in which they promised "to do everything to guarantee financial stability in the euro zone. "That was true then. It is true today," she said.

Ms. Merkel repeated her opposition to any near-term enlargement of the €440 billion ($582.69 billion) European Financial Stabilization Facility, the vehicle used to provide the rescue funds agreed two weeks ago for Ireland. "For us, this is not a question," she said, noting that the Irish deal had taken less than 10% of the funds available to the EFSF. Mr. Sarkozy wasn't entirely explicit in ruling out such a step, saying that "we will do what it takes to defend the euro" and declining to be more specific.

Markets have worried that the EFSF in its current form and size may not be able to cope if the region's debt crisis spreads to countries such as Spain or Italy. The European Central Bank has been buying bonds of some of the euro zone's fiscally weakest members to keep them orderly. The meeting in the southwestern city of Freiburg was in the tradition of coordinating Franco-German policy – not just in economic affairs – in the run-up to European Union summits, the next of which takes place in Brussels next week.

Ms. Merkel was confident that the leaders would formally endorse changes to the EU treaty, making it easier to force private bondholders to share the burden of any future rescues for highly-indebted member countries. At their last summit, EU leaders watered down Germany's proposal to force losses on bondholders as a precondition for providing any more taxpayer money and guarantees in future bail-outs.

The two leaders were equally firm in their opposition to a proposal from Luxembourg Prime Minister Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti for the euro zone to issue a portion of its debt jointly, through what they called "E-bonds". "We must not put the cart before the horse," Mr. Sarkozy said. "If one day there is a lot more integration and a much more harmonized economic policy, we could maybe talk about it then."

Mr. Sarkozy rebuffed accusations of big-country arrogance in rejecting the Juncker-Tremonti proposal out of hand. "Germany and France...have shown their European solidarity and I don't think they have lessons to take on this subject," Mr. Sarkozy said, noting that the two are the biggest backers of the EFSF.

Europe’s Inevitable Haircut
by Barry Eichengreen - Project Syndicate

What once could be dismissed as simply a Greek crisis, or simply a Greek and Irish crisis, is now clearly a eurozone crisis. Resolving that crisis is both easier and more difficult than is commonly supposed. The economics is really quite simple. Greece has a budget problem. Ireland has a banking problem. Portugal has a private-debt problem. Spain has a combination of all three. But, while the specifics differ, the implications are the same: all must now endure excruciatingly painful spending cuts.

The standard way to buffer the effects of austerity is to marry domestic cuts to devaluation of the currency. Devaluation renders exports more competitive, thus substituting external demand for the domestic demand that is being compressed. But, since none of these countries has a national currency to devalue, they must substitute internal devaluation for external devaluation. They have to cut wages, pensions, and other costs in order to achieve the same gain in competitiveness needed to substitute external demand for internal demand.

The crisis countries have, in fact, shown remarkable resolve in implementing painful cuts. But one economic variable has not adjusted with the others: public and private debt. The value of inherited government debts remains intact, and, aside from a handful of obligations to so-called junior creditors, bank debts also remain untouched.

This simple fact creates a fundamental contradiction for the internal devaluation strategy: the more that countries reduce wages and costs, the heavier their inherited debt loads become. And, as debt burdens become heavier, public spending must be cut further and taxes increased to service the government’s debt and that of its wards, like the banks. This, in turn, creates the need for more internal devaluation, further heightening the debt burden, and so on, in a vicious spiral downward into depression.

So, if internal devaluation is to work, the value of debts, where they already represent a heavy burden, must be reduced. Government debt must be restructured. Bank debts have to be converted into equity and, where banks are insolvent, written off. Mortgage debts, too, must be written down.

Policymakers are understandably reluctant to go down this road. Contracts are sacrosanct. Governments fear that they will lose credibility with financial markets. Where their obligations are held by foreigners, and by foreign banks in particular, writing them down may only destabilize other countries.

These are reasonable objections, but they should not be allowed to lead to unreasonable conclusions. The alternatives on offer are internal and external devaluation. European leaders must choose which one it will be. They are united in ruling out external devaluation. But internal devaluation requires debt restructuring. To deny this is both unreasonable and illogical.

The mechanics of debt restructuring are straightforward. Governments can offer a menu of new bonds worth some fraction of the value of their existing obligations. Bondholders can be given a choice between par bonds with a face value equal to their existing bonds but a longer maturity and lower interest rate, and discount bonds with a shorter maturity and higher interest rate but a face value that is a fraction of existing bonds’ face value. This is not rocket science. It has been done before. But there are three prerequisites for success.

First, bondholders will need to be reassured that their new bonds are secure. Someone has to guarantee that they are adequately collateralized. When Latin American debt was restructured in the 1980’s under the Brady Plan, these “sweeteners” were provided by the United States Treasury. This time around, the International Monetary Fund and the German government should fill that role.

Second, countries must move together. Otherwise, one country’s restructuring will heighten expectations that others will follow, giving rise to contagion.

Finally, banks that take losses as a result of these restructurings will need to have their balance sheets reinforced. The banks need real stress tests, not the official confidence game carried out earlier this year. Where realistic debt-restructuring scenarios indicate capital shortfalls, across-the-board conversion of bank debt into equity will be necessary. And where this does not suffice, banks will need immediate capital injections by their governments.

Again, making this work requires European countries to move together. And, with banks’ balance sheets having been strengthened, it will be possible to restructure mortgage debts, bank debts, and other private-sector debts without destabilizing financial systems.

Now we get to the hard part. All of this requires leadership. German leaders must acknowledge that their country’s banks are dangerously exposed to the debts of the eurozone periphery. They must convince their constituents that using public money to provide sweeteners for debt restructuring and to recapitalize the banks is essential to the internal devaluation strategy that they insist their neighbors follow. In short, Europe’s leaders – and German leaders above all – must make the case that the alternative is too dire to contemplate. Because it is.

Pension ruling 'catastrophic' for companies
by Philip Aldrick and Helia Ebrahimi - Telegraph

Members of bankrupt pension schemes have been handed a near-blanket guarantee by a radical court ruling that pushes them right up the creditor hierarchy but has been branded "catastrophic" for banks and companies.

In a fundamental shake-up of the corporate debt structure, pension trustees will be able to demand a lump-sum payment from administrators of a failed business ahead of all lenders bar those backed by property assets. Even the administrators will be lower in the pecking order. Before the ruling, pension claims ranked beneath the riskiest unsecured loans, potentially robbing workers of their retirement income.

In a packed courtroom at the High Court on Friday, Mr Justice Briggs ruled in favour of The Pensions Regulator in its bid to recover funds from Lehman Brothers and Canadian telecoms firm Nortel for the 43,000 members of the insolvent companies' pension schemes. The administrators of Nortel and Lehman, which went bust with UK pension deficits of £2.1bn and £148m respectively, were contesting the regulator's decision to issue a "Financial Support Direction" (FSD) requiring them to strike an agreement with the pension trustees before disbursing funds to creditors.

Under the current rules, if no agreement is struck the regulator imposes a "Contribution Notice" (CN) demanding the administrator make a payment to the trustees. In a ground-breaking judgment, Mr Justice Briggs ruled that the CN would qualify as an "administration expense" – meaning it must be paid above all but "fixed asset" creditors, even before the administrators take their fees. "It's a shock ruling, everybody I have spoken to has got their mouths wide open," said Nick Moser at law firm Taylor Wessing. "Administrators will be discouraged from implementing rescues because super-priority for pension schemes could wipe out any return for any other creditor."

Allen & Overy restructuring partner Jen Marshall added: "This will have huge implications for the restructuring industry. It is potentially catastrophic, the decision is totally untenable. For banks and companies, it is an impediment to the rescue culture." Jonathan Land, business recovery partner at PricewaterhouseCoopers, who advised Nortel's pension fund trustees throughout the two-year case, warned that companies with large pensions deficits, such as British Airways, may find it harder to raise funds as a result.

"This is great for pensioners but will have huge implications for the banks," he said. "Banks will have to wake up to the importance of the pension creditor. They will have a lot more risk to contend with. They should be wary of companies with huge pension liabilities." Mr Justice Briggs said he regretted having to make the ruling, which he blamed on "a legislative mess". "Parliament might wish to consider a suitable amendment," he added.

"The conferring of super-priority as expenses on the financial liabilities arising from the FSD regime is both potentially unfair to the target's creditors and inconsistent with a decision taken in 2004 not to elevate employees' pensions claims above the claims of those creditors." The regulator, whose role is to protect both pension scheme members and the lifeboat – the Pension Protection Fund – welcomed the ruling. The administrators are expected to appeal.

Madoff Trustee Sues Medici Bank, Kohn for $59 Billion
by Bob Van Voris and Dawn McCarty - Bloomberg

The trustee liquidating Bernard L. Madoff’s company sued Bank Medici AG and its founder, Sonja Kohn, calling her the con man’s “criminal soul mate” and demanding $58.8 billion for victims of his fraud.

Kohn used a relationship with Madoff that began in 1985 to help build the Vienna-based bank, feeding more than $9.1 billion of investor money into his company, trustee Irving H. Picard said today in a complaint in U.S. Bankruptcy Court in New York.

“The illegal scheme enriched Kohn, her family, and scores of other individuals and entities, including the largest banks in Austria and Italy, at the expense of the BLMIS estate and on the backs of Madoff’s victims,” Picard said in the complaint, referring to Bernard L. Madoff Investment Securities.

The lawsuit names Kohn, Bank Medici and more than two dozen other parties and is seeking $19.6 billion trebled to $58.8 billion under the Racketeer Influenced and Corrupt Organizations Act. Madoff, confessed architect of the biggest Ponzi scheme in history, is serving a 150-year prison term.

by Michael Krieger


noun \ˈvam-ˌpī(-ə)r\

Definition of VAMPIRE

1: the reanimated body of a dead person believed to come from the grave at night and suck the blood of persons asleep

2 a : one who lives by preying on others

Does the above definition of vampire by Merriam Webster remind you of anything? Yes of course it does, it reminds you of the Too Big To Fail Banks. It was extremely appropriate for Matt Taibbi to refer to Goldman Sachs as the “Vampire Squid.” Just as the above definition lays out, vampires are able to come back from the dead and once they have done so they drain the life out of the living while they sleep.

Need I say more? The big banks and the Federal Reserve are modern day vampires and they are feeding off what remains of the living (productive) parts of the economy while the majority of Americans are stuck in a reality tv, Prozac induced coma of endless propaganda and brainwashing. Indeed the vampires are feeding off of an American public that still by and large remains “asleep.” These are ideal hunting grounds for vampires.

The reason vampires feed on people that are asleep of course is that they attempt to attack when their victim is most vulnerable. The cover of night is when vampires are active, which is exactly why the Federal Reserve must operate in the shadows and why it fiercely fights off attempts to disclose its activities to the public. The TBTF banks and the big trading brokers that scamper off like cry babies to their sugar daddy Ben Bernanke every time they have a losing trading day must be exposed as the economic life sucking vampires and financial terrorists that they are.

They must be brought out into the light of day and exposed for the unproductive, unable to compete in the free market jokers that they are. I have said it before and I will say it again. Until these entities are put out of their misery, restructured and key executives now and from the crisis are prosecuted there will be no sustainable recovery other than repeated phony boosts in aggregate demand created by printing money. More worryingly, the social fabric of the country will continue to deteriorate.

So all this vampire talk leads me to an obvious conclusion. Silver! When I was last on Max Keiser’s show the “Keiser Report” a few weeks ago we discussed the latent power in the hands of the people via their ability to buy physical bullion and take delivery.

There is no more powerful and effective vehicle of political protest than taking this action as a vote against the fascist policies of the Federal Reserve and its abusive money monopoly. This is because the Federal Reserve’s power lies in its ability to create AT WILL as many fiat dollars as it pleases to further its agenda, which at this point is clearly entirely aligned toward helping the bankers and the politicians in what I call the NYC/Washington D.C. cancer center.

Gold and silver are the historical and indeed the modern day competitors to fiat money, which is why they tend to be demonized so much by the mainstream media and financial press and are almost never addressed by Federal Reserve members even though they have been at the heart of global finance for millennia. Ever since our conversation, Max has launched a very powerful campaign aimed at the silver market as a way for the average citizen to fight back against the criminal banking system intent on turning the vast majority of the Western world’s population into modern day serfs. It is prescient and it will succeed.

Part of why I have liked precious metals for many years now is because I knew that this day would eventually come. That the suffering people of the world would finally have had enough and would fight back. I knew that the most effective way to fight the system would be to take physical delivery of precious metals as the surge this would cause in the price would be evidence of a total loss of confidence in fiat money, which could only then be countered by a return to some sort of hard money or revaluation of the dollar in order to reset the system, or the “ctrl alt del” print.

This campaign is not just brilliant in its potential effectiveness but its real power comes from the inclusion of as many everyday citizens as possible in the fight. You see, back in the late 1970s when the Hunt brothers and others bought up a large percentage of the world’s available silver, they were relatively easily demonized and stopped by the government..

No government no matter how thuggish is going to be able to stop millions and millions of people the world over from buying a few ounces of silver. Silver is also in much shorter overall supply than gold since pretty much all 160,000 tons of gold estimated to have been produced over the course of human existence is still around somewhere. Silver is largely consumed and its annual production is estimated at only around 600 million ounces a year. Think about this for a second. While every adult American doesn’t have the $1400 to buy an ounce of gold, they do have the $75 dollars to buy three ounces of silver. So if every adult American spent $75 on silver that is total annual global production folks. See how powerful this is?

Ah but there is more. Keiser’s campaign has been accepting videos from members of its audience that support the campaign and he has then been posting the best one’s on the website. This takes the focus away from any one particular individual and puts it in the hands of the people that are participating. This is extremely empowering just as youtube and the internet in general are extraordinarily empowering. Someone that has never reached more than ten or twenty people in their lives with their views are now reaching thousands through the internet.

The establishment “filter” on news and ideas is gone. The internet is the Guttenberg printing press on steroids. Let’s not forget that the Guttenberg press was key in sparking the Renaissance. This is why I am completely convinced that the current system will collapse. It has run its course and is no longer helpful to humanity’s progress in the 21st century. The people do not want things to stay the way they are and in fact the means of ending it are very simple. Much more simple than voting at the polls for politicians that know nothing and can be bought off within a week. Vote with your money. Buy silver.

Joseph Stiglitz: America's QE2 poses 'considerable' risks
by Andrew Trotman - Telegraph

Nobel Prize-winning economist Joseph Stiglitz has said the US government's second bout of quantitative easing poses 'considerable' risks to global economies. “All this liquidity that they’re creating is not going back to grow the American economy and is going to Asia and other emerging markets where it’s not wanted,” Mr Stiglitz said. “Most of the countries around the world have begun to react. They put in capital controls, exchange rate interventions, taxes on these capital flows - a variety of interventions.”

The Federal Reserve is set to buy an additional $600bn of Treasuries - dubbed QE2 - until June 2011 in an attempt to boost economic growth, according to the central bank's chairman Ben Bernanke. However, Mr Stiglitz maintains that banks in America will invest money provided under the Fed’s program in Asian and other emerging markets, which have recovered faster from the recession.

An increased rate of capital into such markets could cause currencies to appreciate and create asset bubbles, he warned. Net private capital flows to emerging market economies will rise 42pc to $825bn in 2010 compared with $581bn in 2009, according to trade group the Institute of International Finance. Brazil's real has gained 1.5pc against the dollar so far this year, and Chile’s peso has appreciated 6.6pc against the greenback.

“Unintentionally, QE2 is leading to a fragmentation of global financial markets because each country takes actions to protect itself,” Mr Stiglitz said. “As more and more do that, it puts more and more pressure on those that don’t, and they will eventually be forced to take some form of action.”

Meanwhile, confidence among US consumers increased in December to a six-month high. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 74.2 from 71.6 at the end of November. A Commerce Department report showed the US trade deficit shrank more than forecast in October to $38.7bn as growing economies overseas propelled exports to a two-year high.

Glenn Beck Warns Of Food Riots, Martial Law & Gun Confiscations

Ron Paul Defends WikiLeaks: "Killing The Messenger For Bad News"


jal said...

Thank you for the education!

The web has provided me with an economic education that is unavailable from any ivy league institution.

I do not need the degrees that are issued by those institutions of learning.

I'm applying the knowledge that I have gained to improve the survivability of my circle of life.


John Hemingway said...

What a fascinating article! I miei complimenti to Ashvin Pandurangi:-)


Hombre said...

Today's post by Ashvin Pandurangi is as elegant as it is cohesive, like a small piece of computer programming code that does a lot of work!
This is the gist, IMHO:
"The debt-dollar disciplinary system has been in a phase of extraordinary growth for the last few decades, exploiting markets and resources to increase inter-dependencies, systemic diversity and overall wealth. However..."

It's the part after the "however" that describes the fallout and difficulties we are going through now and will be for a long time to come.

From the Bloomberg article:
"Prices are likely to stop falling in the second half of next year and take another three to five years before making strong gains..."
Strong gains? I wonder who will supply the demand?

I. M. Nobody said...


I think you were being disingenuous there. I am pretty sure you are well aware that humankind lives on hopium. If the Long Emergency lasts a thousand years, somebody will be always be assigned the task of predicting a recovery within a few years. Almost no one believes we can handle the truth.

Hombre said...

IMN - ;-)
The "I wonder who will supply the demand...." was of course ironic rhetoric. ;-)

I think the Ron Paul speech was speaking truth to power (even if the powers won't listen.) I like this guy!
As for Mr. Beck, I agree with many of his points but... his biases and ego drown out the message for me. Reminds me of Karl D.

sofistek said...


I was reading a piece by Rob Hopkins. It wasn't about your views, per se, but included this:

"Is Stoneleigh right, that we are about to see the imminent collapse of the financial system (she did say at the 2010 Transition Network conference that by now my house should by now be worth what it was in 1974, which is patently isn’t)."

I'm pretty sure you've never uttered that view, in terms of timelines. All I recall your saying is that bubbles always collapse to levels that prevailed before the bubble started and that house prices could, therefore, be expected to fall to levels seen at the end of the 70s. If Hopkins is wrong, and I think he is, could you correct him and get him to publish that correction?


I. M. Nobody said...


Just so you know, I like your rhetorical style. ;)

The powers already know the truth that matters to them. That truth being that the principle goal for having power is to retain power. Retaining power is most easily accomplished by using it to change the rules so that threats to their power are minimized or negated.

Certainly in the case of Beck and probably in the case of Ron Paul, it was minions of the powerful that wrote their lines. Part of the defensive strategy to have a few "heroes" telling us what WE want to hear. Mainlining another small dose of hopium, so we will be more inclined to bear the pain a little longer. That's really about all they need.

The powerful will not give it up voluntarily. If they are somehow forcefully divested of power, those who forced it will be the new powerful and will know the same truths. Rinse and repeat.

bluebird said...

Metanis said (yesterday's posting) - "When the collapse happens I'm going to miss the Internet the most."

Ditto that

I could even see TPTB shutting down the Internet to keep us safe from the 'terrorists'.

If there is no Internet, I assume there goes online banking too. Perhaps it's time to go back to receiving bills, and writing checks or money orders.

jal said...

@ I&S
Can you give me an honorary degree for taking active participation in your classes with honorable mention for realizing that our past economic system is finished, reseting and for preparing my circle of life for the new lifestyle?


Mike said...

Fresh from Zero Hedge:

It blows the deflationist case out of the water.

"The biggest piece of news in Thursday's Z1 statement........As of September 30, Bernanke has successfully stopped the net decline of monetary aggregates even when including the massive shadow banking system."

Ilargi said...

" sofistek said...

I was reading a piece by Rob Hopkins. It wasn't about your views, per se, but included this:

"Is Stoneleigh right, that we are about to see the imminent collapse of the financial system (she did say at the 2010 Transition Network conference that by now my house should by now be worth what it was in 1974, which is patently isn’t)."

I'm pretty sure you've never uttered that view, in terms of timelines. All I recall your saying is that bubbles always collapse to levels that prevailed before the bubble started and that house prices could, therefore, be expected to fall to levels seen at the end of the 70s. If Hopkins is wrong, and I think he is, could you correct him and get him to publish that correction?


Stoneleigh never made that claim, and we told Rob Hopkins that in person in Bristol, what?, 10 days ago?!

It's a really peculiar thing to repeat, in my view. Either Rob hasn't listened while we were sitting at the same table, or he doesn't want to listen, or he's maybe simply not all that smart.

Where's the link to that piece, please?


Ilargi said...

" Mike said...
Fresh from Zero Hedge:

It blows the deflationist case out of the water.

"The biggest piece of news in Thursday's Z1 statement........As of September 30, Bernanke has successfully stopped the net decline of monetary aggregates even when including the massive shadow banking system.""

Right, and now I'm supposed to say HAHA!, or something?

You know what? With another X$trillion or so in the system, you show me the inflation. And no, inflation is NOT rising prices.

According to John Williams, M3 is still (November) shrinking by more than 2%.

Bunch of amateurs.

Let's move to something serious, shall we?


Ilargi said...

Hey Hemingway,

Nice to see you mate. You still in C'est toi ma ville? Go Habs go!


John Hemingway said...


Yep, I'm still here:-) Let me know when the two of you are passing through again. Last summer we moved to the Snowdon area, which means that now it's a hell of a lot easier to get to that favorite bar of yours!

Un abbraccio a voi due!

Jb said...

"They must not only confront the fact that they have been deceptively enslaved, but simultaneously impoverished as well."

"Let's move to something serious, shall we?"

How about a collective refusal by what's left of the middle class to pay off the debts that cannot be paid off?

As recent events in Ireland suggest, western governments are at the mercy of the financial institutions which keep them in power. By doing so, are they not forcing people to take matters into their own hands? To whom are our elected officials beholden too? In lieu of political courage, I see mass suffering ahead.

Thank you for your efforts.

logout said...

@ ilargi

"According to John Williams, M3 is still (November) shrinking by more than 2%.

Bunch of amateurs.

Let's move to something serious, shall we?

That's it? That is the sum total of your rebuttal of this article? Insults and misrepresentation? I think J Williams is expecting hyperinflation, is he not?

Deflationists Take Note: Bernanke Succeeds In Offsetting Shadow Banking Collapse

Now all youse I&Sers ! Try doing an experiment and do a word search for 'inflation' and 'deflation' on John's site:

ilargi I think if you are going to lead the kiddies blindfolded down the garden path you had better make sure that any rogue elephant in the bushes don't squash em completely flat, have them hold at least an American Gold Eagle or a Canadian gold Maple Leaf in their chubby little hands, you know, just as insurance.

BTW , but don't get all joyous, I do have a couple points of disagreement or questions about the bias I see in that article.

Ash said...


Although I'm sure Tyler and others at ZH know much more about the intricacies of finance than I do, it seems they are making some drastic conclusions from a rather small data point (they are known to use hyperbole from time to time, although I admit it seems they are even more adamant than usual about inflation in this article).

They conclude that the prediction by deflationists of asset prices collapsing is completely undermined by a $3.8 billion uptick in shadow liabilities in Q3 2009. This uptick is only comprised of those liabilities identified as "funding corporations", "repos" and "open market paper". It does not include liabilities assocaited with money market mutual funds or agency mortgage pools.

Are we to conclude that, after two straight years of declines in these liabilities, a slight uptick proves that money aggregates have permanently bottomed and will now proceed to spiral up out of control? Perhaps the artificial support for assets in recent years via funneled money to PDs has circularly caused them to become more confident in their ability to take on risk.

But that's the thing, they don't really believe they are taking on much risk, as ZH states at the end:

"Of course, all of this is possible only because the state is now the ultimate backstopper of all risk."

What happens when the state is unable to continue backstopping? How about when they are forced to realize more losses on their massive mortgage liabilities? I'm sure the inflationists would say the backstops will never cease and we will continue more spending and printing, until hyperinflation is sparked, while the deflationists would say that it will next to impossible politically and/or economically to accomplish such a feat.

With regards to the latter, I highly doubt that this slight uptick gives significantly more credence to the assertion that Bernanke is, in fact, more powerful than the combined weight of all those non-productive liabilities. So basically, we are left with almost the same debate we had before this article.

Wyote said...

An absolute must read:
A Secretive Banking Elite Rules Trading in Derivatives
from the NYT.

The banks and the scopaths that sit at the big game.
These are the biggest preps.

Know thy enemy. read it before it's gone

Hombre said...

Wyote - Potent link!
When I read through an article like that, I only understand about half of it. But I DO comprehend what a complex and corrupt system of economic chaos lies underneath our big banks and the whole of the economic system.
Compared to some of these people a guy who heists a few bucks from the gas station is a mere nuisance. These moneychangers hold entire countries in the palm of their hand! And for what?

Ash said...

The NYT article is somewhat interesting as a primer on what derivatives are, but it's so 2007. Where were these stories back when we had a chance of doing something about it? When Brooksley Born was getting stonewalled in her attempts at regulating these instruments back in 90s!

The article is typical of mainstream publications in that it starts off with a thrilling title and introduction about secret meetings by elite bankers, then it progressively waters itself down. Yes, a few banking giants control the derivatives industry (who else possibly could?), pushing prices up for businesses and consumers while extracting large economic rents through commissions and fees. But I just described a huge portion of the entire US economy, not just the derivatives market, and for decades now.

Maybe NYT should be reporting on the fact that these trillions worth of derivatives are literally a ticking time bomb, just waiting to explode after a signficant adverse move for either party to these transactions. Where is all the capital to back up these liabilities? It doesn't exist...still.

The sad thing is that their correct assessment of the situation leads them to a faulty conclusion - we need more competition and transparency in the derivatives market. Well competition is exactly what we need less of in financial markets, and talking about transparency now is a bit like closing the barn door a decade after your entire stable gets out.

NZSanctuary said...

Europe’s Inevitable Haircut
by Barry Eichengreen - Project Syndicate
What once could be dismissed as simply a Greek crisis, or simply a Greek and Irish crisis, is now clearly a eurozone crisis.

Sometimes you know a journalist has no idea what they are talking about by their first sentence.

Thankfully Ashvin's article was excellent.

snuffy said...

Hombre,I am with you as far as Beck goes.He is a "entertainer,and has loads of baggage...

The Wall Street manifest,and the response,show the incredible divide we have.The wealthy have no shame at this point,and the self-reinforcing rhetoric those in the halls of wealth and power delude themselves with will be their doom.They dream of endless power and privilege for their own...yet forget in a haze,a fog, of their own making...the old chinese truth "Disaster comes in the 3rd generation"..and we are just about there....

Since the Fed takeover in the 1940s,we have seen the wealthy quietly reshape out society in the image they wished,as well as change nearly all the laws that restrained them.There is no desire to use their gain for anything except continued forcing of more of what little is left to their private coffers.

We the people,lost.They[the wealthy]won,and are not shy of rubbing it everyone's face.The psychopathic,sociopaths who have stabbed ,hacked,and clawed their way "up the ladder",now rule us all with no moral compass....just one of greed.

The mistake they made,and make every time,is letting the mask drop....letting the poor folk see just how they are despised and discounted.The gut-tearing show we see now about unemployment extension is a excellent example.

There is a dark rage brewing in oh,so many now,due to the expectations of a good life being snatched away,and fear of the future replacing it.

Deny it at your peril.Discount it,and it will bring woe and terror into everyone's life in spades.Most of the ones running the show don't realize the middle-class citizens they are gutting and throwing in the street,will be the skinny,hollow-eyed gun-man,and women, taking aim at their own precious children as they get in the motorcade to the next "safe" place,after they have seen their own offspring warped and sickened,and killed, by the new reality they have brought us.
I see no way this will change except general collapse.The speed is it will play,how it will morph is anyone's guess,but the collapse of a complex society is a very messy business.
The very wealthy may believe they would be relatively unaffected by this....after all its only the little people who ever get hurt but they are so mistaken.

They have never lacked a meal,nor learned where food comes from.They have become parasitic,to the host deadly, in their demands of more,more, more...

Bad things happen to parasites.

Work is good,it clears the mind,and makes deep sleep necessity...hard to lay awake with worry when you are way,way tired....

Bee good,or
Bee careful


sofistek said...


I included a link to the Rob Hopkins piece in my comment but here it is in the clear:

ciaoant1 said...

Hitler parody - Hitler as a CEO:

Stoneleigh said...


I'm pretty sure you've never uttered that view, in terms of timelines. All I recall your saying is that bubbles always collapse to levels that prevailed before the bubble started and that house prices could, therefore, be expected to fall to levels seen at the end of the 70s. If Hopkins is wrong, and I think he is, could you correct him and get him to publish that correction?

You're quite right, I never said that. That is simply not how real estate markets work. In fact I explained that to Rob in person less than a month ago when we he interviewed me in Bristol. If he is still publishing material containing statements like that I'll have to have words with him.

As I told him, a real estate collapse begins with illiquidity, where nothing much sells and inventory rises sharply. There is a persistent gap between what sellers will accept and what buyers are prepared to offer. Asking prices may even continue to rise during this time.

Eventually, some sellers will get desperate enough to drop their prices, trying to bridge the gap to the downside. This may work for some if they are prepared to be sufficiently realistic, but many sellers will cut too little and too late, following the market down. As sellers drop their prices, whole neighbourhoods are repriced at a lower level. What buyers are prepared to offer falls further once buyers become aware of the new trend to lower prices, because they simply wait, maintaining the gap between themselves and sellers. Thus the illiquidity persists.

It would be a buyers market IF cheap credit remained available, but it won't. As credit dries up almost completely in a major deflation, the pool of buyers will contract sharply, until the only buyers left are those who can pay cash and who choose to use very scarce cash for that purpose at that time. At that point price support will have collapsed completely.

After an asset bubble, there is always an undershoot. I expect homes to be worth less than their constituent materials for a period of time. After all, much home construction recently has been a giant exercise in negative added value, as we have built mostly suburban sprawl with structural dependencies on cheap energy, cheap credit and many other centralized life-support systems.

Home prices can fall to virtually nothing, depending on the local circumstances (ie remaining economic opportunities in the area). During the Great Depression, some of the best farms in the country were repossessed and offered at auction, but received no bids. These should have been genuinely productive assets, but no one had the money to buy what they could have produced, and no one with the cash was prepared to buy the asset. When you take the money out of the system, perverse things happen.

I am not expecting a bottom in real estate for years to come. When we do hit a bottom, I would expect the asset prices of the 1970s to be the best case scenario, as I have said in my talks. The bottom could easily be lower than that, as I think we are correcting something larger than the expansion since the early 1980s.

sofistek said...

Thanks for that Stoneleigh.

Rob Hopkins most certainly is saying that (see the link in my post), so words definitely need to be had with him!


Brunswickian said...

I'm not convinced that (m)any realise what this means:

Comprehensive Release
For reasons stated above and others, the financial disciplinary system has entered a phase of irreversible release. The sub-prime housing crisis in the U.S. was the triggering event for this global release, in which the complex power structures supporting debt-dollar discipline will be rapidly and chaotically dismantled. Without pervasive access to affordable credit, the vast networks of discipline around the world cannot be coherently maintained (i.e. international trade heavily dependent on "letters of credit"). This credit had become the lubricant enabling Foucault's disciplinary machine to operate smoothly, and without it, the machine will grind to a screeching halt.

zander said...

Hi Stoneleigh,
Sorry I should've posted this on topic.
What do you think of prof. Cynthia Kenyon?
I just listened to a WS podcast of her DAF 16 gene theory, and she recommends Atkins, absolutely fascinating. What say you?

re. the real estate point. I see what you describe happening all over Edinburgh, there are so many for sale/to let signs up it looks like d day celebrations. my local RE office just closed this very Friday.


Jamie said...


Didn't you call for the S&P 500 to be around 100 if we were lucky in 2010?

Why haven't things panned out like you thought they would?

Hombre said...

Ash - You are astute and make some very good points.
But remember that many of the NYT readers are just now becoming educated on how all this stuff works. In decades past folks working in electronics, communications, construction, etc. did not set aside a part of their day to study international and corporate finance. Until the bust of 2008 it was not deemed crucial.

You wrote...
"Maybe NYT should be reporting on the fact that these trillions worth of derivatives are literally a ticking time bomb, just waiting to explode after a signficant adverse move for either party to these transactions. Where is all the capital to back up these liabilities? It doesn't exist...still."

Actually that was one underlying point I got out of this piece and other articles like it, that the picture being painted is of a giant ponzi arrangement (the derivatives industry) which is going to... has to... collapse at some point. And it will take a lot of political structures with it, States and states.

Those of us in the hinterlands, who only recently (a few years) became aware of how convoluted, complex, and corrupt our banking and economic systems are, are somewhat stunned in disbelief at the reality, and the coming catastrophe.

T.M.O. said...


You said, "And no, inflation is NOT rising prices."

Yes, that's true. However, for most people, monetary aggregates don't matter. What really matters is the value of the money in their pockets and savings accounts.

While the economists argue about which monetary aggregates are most germane to the inflation/deflation debate (if they can even agree on what inflation and deflation are),…

…and while the government publishes manipulated CPI data, there is plenty of evidence showing that the real costs of many goods and services are rising much faster than the incomes of the middle class and the poor.

The end result is a higher cost of living. This is what most concerns the average person, (not M0 vs. M3)., And I think that is what is being expressed in some of the comments here.

You and Stoneleigh have yourselves pointed out that even in deflation the cost of living, in real terms, can rise. An excellent point, and for most people, the only one that really matters.

jal said...







Stoneleigh said...
... It would be a buyers market IF cheap credit remained available, but it won't. As credit dries up almost completely in a major deflation, the pool of buyers will contract sharply, until the only buyers left are those who can pay cash and who choose to use very scarce cash for that purpose at that time. At that point price support will have collapsed completely.

I would expect the asset prices of the 1970s to be the best case scenario,

Hombre said...
In decades past folks ... did not set aside a part of their day to study international and corporate finance. Until the bust of 2008 it was not deemed crucial.
Those of us ..., who only recently (a few years) became aware ... are somewhat stunned in disbelief at the reality, and the coming catastrophe.


Jamie said...

Didn't you call for the S&P 500 to be around 100 if we were lucky in 2010? 

Why haven't things panned out like you thought they would?


Brunswickian said...
... pervasive access to affordable credit, the vast networks of discipline around the world cannot be coherently maintained
I don't trust that the lenders will repay the loans. I hate debt! I prefer cash!
Credit is not today's cash. It is tomorrow's cash.

A Walk in the Woods said...


You yourself seem fixated on the word 'prices'.

What an imprecise term and concept.

The germane term would be 'purchasing power', which takes into account the Relativity of the 'price' that is payed for goods and services.

"Prices' are always and have always been Relative. Since the Dawn of Civilization.

To even use the word 'prices' is next to meaningless.

If I'm in the top 10% of net income, the 'prices' for the necessities of life have little meaning to me. My net income is rising even now, faster than 'prices' so my 'purchasing power', the only real thing to concern me as an intelligent well informed adult, is actually rising. Life is Good, I don't give a fig about 'prices'.

I don't have a whole lot of respect of the Average Person's use of language. They did, after all, practice willful ignorance of finance, by and large, for most of the 20th century, even the so called 'educated' ones with college degrees. The ones with college degrees never fail to point this out to the ones who don't have one. And yet, even they seem incapable of using language intelligently or educating themselves on financial terminology. Now they're whining about 'prices' going up?

How about a big fat heaping helping of 'my purchasing power' is going down even as my highly successful brother in law's 'purchasing power' is going up because he still has a great job and I don't.

Dear Abby,

WTF? How can 'prices' be going up but my 'purchasing power', as an unemployed ex-cubicle rat, be going down and my spoiled rotten sister and her smug employed husband's 'purchasing power' be going up.


I'm Sooo Confused

T.M.O. said...

A Walk In The Woods,

You are correct in using the term "purchasing power" if applied to the value of a currency, not the wealth of any particular individual.

Take note: nowhere in my comment to Ilargi did I mention prices; I referred to "real costs" or the "cost of living" which can be rising, even if prices are declining. That was my whole point.

Bigelow said...

Trends in Income Inequality Youtube

Greenpa said...

Sorry if I missed this; but it was news to me:

The Repuglcans are putting Ron Paul in as Chair of the Fed oversight sub-committee...

No bread there, but wow, the circus potential!

logout said...


"Although I'm sure Tyler and others at ZH know much more about the intricacies of finance than I do,

First you miss my point, which was a criticism of the manner and lack of content of ilargi's response, but you answer the article better than ilargi has done with his toss off of something which contradicts his position. As well it is pleasant to see that you have the humility to admit your knowledge is not omnipotent.

I, as well, do not know how all this will play out but what I do know is that if I refuse to be willing to change my position, or at least prepare for the possibility that there might be different outcomes, then I leave myself vulnerable. Uncertainty can be a strength not a weakness as it keeps one watchful. While the outcome, that of collapse, is almost certain, how and when it arrives is not. At the moment what I see is that the wealth in the pond is being drawn to the centre and many are being left floundering on the shore. How long that can go on, I do not know.

I have mentioned holding a small amount of gold as insurance. There are other ways of insuring for the future, but none so easily done by all no matter what their present situation.
For instance not many are lucky enough to be in the position to own a 'farm', but holding a little bit of gold, which is good in any sort of 'flation', may proxy for that 'farm'. Is that something to think about?

Mobility in thinking is the watchword now, not catatonia.

JackRussell said...

There was an interesting story today in the Washington Post, where they talked about how far 250,000$/yr actually goes.

the really interesting part was that they gave examples of family budgets in several locations in the country:

and in virtually every case, they managed to come out at the end of the year with negative cash flow. My wife and I were going through the lists and were astounded by how much they assumed people were spending.

To begin with, it apparently assumed a 3K/mo mortgage. Apparently they expect people to max themselves out. Probably for a McMansion of some sort.

They also assume 7K$/yr for car loans. Evidently they assume that people don't drive older paid-off cars. And they assume that people spend 6K$/yr on gas, which is more than double what my wife and I spend. Although to be fair, by driving older paid-off cars, the maintenance costs are a bit higher.

On and on down the list. Some of the differences were fair - we don't have kids, so we have no child care and no college savings.

I went through and added up all of the categories where we have no expenditures as compared to the budgets in the paper, and we spend something like 75K$/year less. And that's not counting places where our expenditures aren't zero, but are significantly less than what they have in the table. But then again, we don't earn 250K$ either, so it isn't like we end up with that much left over in the bank every year..

I suppose the lesson really is that no matter how much people make, the vast majority of people will spend it all on one thing or another.

Ilargi said...

" logout said...
@ ilargi

"According to John Williams, M3 is still (November) shrinking by more than 2%. Bunch of amateurs.Let's move to something serious, shall we?"

That's it? That is the sum total of your rebuttal of this article? Insults and misrepresentation? "

That's all it merits: big sensational headline, very little substance. Just take one look at the graph included.

As for John WIlliams, Stoneleigh has written the rundown on him: Stoneleigh takes on John Williams: Deflation it is

Oh, and misrepresentation? Of what?


Mr. Kowalski said...

Nations do indeed have a choice in whether or not they choose to backstop banks. Ireland seems to be meekly going to the gallows, following Greece and Spain into indentured servituide. It's been done before, and recently to boot, and the results were not what you expect:

logout said...


To answer you, your comment leaves one with the impression that Williams is a deflationist. As to the article I am not defending the article I am criticizing your response.

Up to speed ilargi up to speed!

(insults are easy, aren't they, and they really merely amount to a cheaper sort of propaganda, don't they?)

Shamba said...

Ahem, Excuse me but I have a question about the DVD. It has occurred to me that I have no idea when you guys, TAE Associated, will be mailing the dvd to me!

I feel rather dumb about this but did I miss something in the purchase process or ______.

Could Stoneleigh and Ilargi please fill in the blank up above! I paid with paypal,

feeling confused, Shamba

scandia said...

Database shows how bees see world in UV...

Ilargi said...

"Ahem, Excuse me but I have a question about the DVD. It has occurred to me that I have no idea when you guys, TAE Associated, will be mailing the dvd to me!"

We don't mail them, CG Publishing does. I think the timing depends on where you live; I know a whole batch goes out to the US every Tuesday.


logout said...

Good interview on Max Keiser. .. a real pond shrinker! Makes inflation?/deflation? mere side issues.


Watch that, and then let's discuss the real questions for our times...such as:

Do we have a prison gap ... are there enough workhouses ... and is Zyklon-B a must have for one's investment portfolio?

I. M. Nobody said...

@ logout

Yes, no and maybe.

Bear in mind that the hapless ones can be worked to death in the fields and on the roads. Repairing stadium roofs, etc. Given our previously sedentary lives that may be very effective. Should it not prove to be so, then ja gehen lange Zyklon-B.

Hombre said...

Logout - The inflation, deflation debate has been and remains a side issue. All issues are secondary to survival.
Max is a fun guy though, indeed.

JackRussell said...

There used to be a sort of implied social contract that came out of the Great Depression. The rich would have to pay more in wages and taxes, but out of this they got the benefit that there would be social order and no further talk of confiscation of assets. Gradually the middle class became more conservative as their lives became more comfortable, and thus they resisted changes that could upset the status quo.

The middle class is now disappearing rapidly. It kind of reminds me of the rush for the lifeboats on the Titanic - by the time the people from the lower decks managed to get up to the top of the ship they realized that the lifeboats were gone and that they were thoroughly and totally screwed. And as people lose the comfortable lives that they had before, they will again lose their faith in the government as they did 80 years ago.

As people become desperate, unrest can take many forms, and it can be highly unpredictable as to what forms it will take. It doesn't have to involve riots. Something like a "strategic default" could be viewed as a form of protest, for example. The groundswell of support for Wikileaks could be another.

logout said...


" Logout - The inflation, deflation debate has been and remains a side issue. All issues are secondary to survival.
Max is a fun guy though, indeed.

Hombre please be more definitive per term survival.

Survival of this economic system, this 'civilization', our species, other species, the planets ecosystem in general, or a sense of humour? As in this from the early 70's:

"Whether or not it is apparent to you, undoubtedly the universe is unfolding as it should.

That guy was a fun guy too IMO:)

I. M. Nobody said...


I have been listening to people express lack of faith in the Usanistani government for over 30 years. People from all parts of the spectrum from very well off to living on welfare. At the present time I don't think I could name one person that I could count on to say they have faith in the gov.

So, where's the unrest? How are they keeping the riots a secret? Did you watch Max's interview of Paul Craig Roberts?

Not only will the revolution not be televised, it will be indefinitely postponed until a launch date can be found that will not conflict with any doing something with stars extravaganza.

Dan said...

@ I.M and Jack,

I don't think there will be a revolt here. Too many people addicted to mind-numbing pursuits: TV, etc. The people in charge understand the benefits of a docile populous. Before revolt occurs, the government will dispense free oxycodone and free TV's to everyone. The WAR will be fought abroad.

I. M. Nobody said...

@ Dan

Gore Vidal expressed the same sentiment RE the revoltingness of we Usanistanis well over a decade ago. I agreed with him then and I agree with you now.

Even as recently as the Vietnam carnage, quite a few men could work up the gumption to frag their officers. Now even that tiny reservoir of rebelliousness seems to have been almost totally drained.

Following what logout alluded to, I do think there are likely to be places remarkably similar to concentration camps. If they do the marketing right, I wouldn't be surprised if many of the desperate might volunteer to live in them. We don't seem to be having much trouble getting them to volunteer to travel to far away places and kill people that are strange to them. Chances are, they can also be induced to run those camps.

Baby Boomer said...

No sleep 'till.....

No crash 'till

AFTER the safety net has been removed.
AFTER social security is gone.
AFTER medicaid is gone.
AFTER the 401K becomes a prison.

FREE FED money will keep the asset party going 'till the crash cushion has been removed. We've got plenty of time 'till that happens.

Make hay while the sun shines

Hombre said...

Logout - Ok.
As I watch our artificial society begin to crumble it is merely amusing, to one not being an economics buff, to hear folks debate rather irelevant (to me) terms such as the infl- defl- ation issue, ping ponging back and forth about it, challenging I & S about it. Posters debate it at sites like ZH-Tyler Durden, Mish, Martenson, etc. Interesting, yes, but not at all VITAL! In the meantime I have to admit to being impressed by the articulate expressions of our hosts and most of the posters here.

But survival issues, food, water, shelter, community and a means of barter, are close to the earth, and they will gain prominence as the structures of our civilization melt away.

As a young man I read and carried underneath the seat of my vehicle a copy of Thoreau's journal. Most of what he wrote about has rang pretty true it seems to me.
Simplify and see through, or see beyond, the culture into which you were born.

Hombre said...

Re: "Whether or not it is apparent to you, undoubtedly the universe is unfolding as it should.

Yep, but keep your hands on the wheel while driving.

logout said...

"As a young man I read and carried underneath the seat of my vehicle a copy of Thoreau's journal.

I enjoyed his bet (thoreau's) that he could make a journey by foot before his friend could work and make enough money to do the journey by rail.

You speak like a self sufficient feller with his own farm and not like one living in a city and dependant on buying his food and all the while wondering which beast, inflation or deflation will eat him if he makes a bad choice. Or Maybe you are that rather rare individual in town who has his mite in gold and so, as well, fears neither inflation or deflation?

Heh! About keeping my hand on the wheel, I keeps my hand on both wheels ... self sufficiency and a little metal for the hearts sake.

M said...
This comment has been removed by the author.
Wyote said...

Wikileaks IP:

Concerned the government will take down you primary domain name? Post your IP address on the main page of your website.

may have some future potential here

Shamba said...

@Ilargi who said:
We don't mail them, CG Publishing does. I think the timing depends on where you live; I know a whole batch goes out to the US every Tuesday.

thanks for the answer


T.M.O. said...

Stoneleigh and Ilargi,

RE: The Zero Hedge article: "Deflationists take note:…" (as was previously discussed by others here)

Mr Durden writes: "…Bernanke has successfully stopped the net decline of monetary aggregates…" He goes on to say that all we need now is a bit of confidence in the economy to get velocity going and it's "Weimar."

I (and many others, I'm sure) would appreciate your input on this:

• Do you think Durden's interpretation is correct?
• If so, is he overstating the importance of this?
• Does this, as he suggests signify a trend change, or perhaps just as temporary blip?

In short, does it matter, and if not, why not? Durden seems convinced an inflection point has been reached.Yes? No? Maybe?


Hombre said...

M - He reminds me of Bob Marley, whose music I was always fond of, especially the Legend pieces.

snuffy said...

I honestly think all those who believe the majority of 300 million or so "average citizens" will quietly sit on their duff and starve are a bit delusional.

Jack Russel,your right about that contract.The "Other Side" violated their part, and decided we were getting to uppity,wanting good health care,long life,and a dignified old age.The financial analysis I have seen in such places are so far off the mark as to be meaningless to the median income folks.....last time I heard it was around where does the 220k come from?

[Our monthly budget w/all outgoes is around $1700,total w/house-payment.Mrs snuffy and I are frugal types]

Thanks for the link Scandia.Bees also see IR so dont think you can go Honey dipping in the dark[grin]...

I will note the propaganda/entertainment machine here is the finest that many, very clever,sociopathic minds could create.It has the ability over any extended period of time to shape the public perception in a way unknown to any tyranny in the past.It tells us everyday how lucky we are to be part of such a wonderful society.[ick]If YOU do not think so ,you must be some kind of sick perverted TERRORIST type asswipe!!

But,here in the USA,when you have "heard it all before".Much of this sort of stuff washes over your mind w/o connecting....the same way the old soviets looked at Pravda.
[I know the analogy is poor,but at a certain point,all this dreck is meaningless drival,and your "brain filter" knows when to call BS.]

Most people,truth be told,are a good sort.They will not abide the[way-out] actions taken by the extremist in any group,but may be swayed,depending on what inputs fate gives them.I believe we will see a fragmentation based on regional needs,and mayhaps religion,ethnic and socioeconomic status.....but where each tribe that forms "goes" after the collapse is anyone's/everyone's guess.
A constant forming,and reforming based on how successful the endeavors/survival rate is,may be the standard for a time,maybe a long time,as groups will form based on needs of the participants...


Tired...sleep of the just awaits me...

Bee good,or
Bee careful


I. M. Nobody said...

Yes snuffy, we do have an amazing propaganda machine. And some downright evil people oftentimes behind it. More often than not for money. I just finished watching this rather amazing documentary movie that pulls back a curtain or two. It is germaine to the hot topic of a few days ago. I would have posted it then if I had known about it.

Fat Head

Heathercita said...

Why is Glenn Beck added to your list?? I thought this was a facts-based blog. Sometimes these kinds of forehead slappers really make me wonder about you guys.

Draft said...

I have to agree with Heathercita about Glenn Beck. Just because in this instance he is saying something TAE might like doesn't mean he's credible.

It'd take hours to list every instance of his horrible track record, because it's far too well known to be ridiculous. For example, for laughs, if nothing else, let's not forget about Beck's OLIGARHY episode.

Ilargi said...

First of all I'd say that one simply shouldn't use the terms Glenn Beck and credibility in the same sentence, but he does make some snippets of sense in that clip. Notice how he says what we always have and do: get out of debt! Still, if it still after all this time is not clear where we stand vis a vis the likes of Glenn Back, what can I possibly say?


Ilargi said...

"• Do you think Durden's interpretation is correct?
• If so, is he overstating the importance of this?
• Does this, as he suggests signify a trend change, or perhaps just as temporary blip?"

All you need to do is to look at the graph in the article. There is a huge arrow in it, because without that arrow you wouldn't even see the "big" change.

I think it's a sensationalist little piece, that takes what might just as well be a statistical error and turns that into "proof" that we can't have deflation.

Moreover, that would also mean that we've had bigtime inflation over the past two years (see the graph). I see no-ome acknowledging that, though.

It's just a storm in a tea cup, and we'll see what develops going forward.


Baby Boomer said...

Want to see a magic trick?

I make the ace of spades disappear while distracting you with a furry rabbit.

I take away take away your retirement benefits while levitating your stock market account.

When do you cash in your stocks?

When congress takes away your Social Security.

Til then,

print = stocks = profits = cha-ching!

Why no discussion of this obvious sleight of hand at work right now?

JackRussell said...

My guess is that the rich have lost their fear of militant leftism - possibly because in their minds the collapse of the Soviet Union means that state ownership of much of anything has been discredited. Without that fear, the upper classes wanted to reclaim what in their minds was theirs to begin with, and this has been going on since Reagan was president.

People generally aren't that desperate yet to act up - those that still have jobs, and still have their homes are hoping that things will turn around and they will make it through.

Unemployment insurance helps to keep people a lot calmer. If the Republicans ever succeed in killing it off, then that safety valve will be gone.

But once you have lost the job and lost the house, the frustration and anger will really start to fester. The directions that this will take people are highly unpredictable however.

T.M.O. said...

Thanks, Ilargi.

Ilargi said...

" T.M.O. said...
Thanks, Ilargi."

Please allow me a correction:

"Moreover, that would also mean that we've had bigtime inflation over the past two years (see the graph). I see no-one acknowledging that, though."

That of course should have read "Deflation".


Dan said...

@ Glenn Beck, etc.

Glenn Beck is a self-aggrandizing snake-oil pseudo-intellectual televangelist whose primary goals are making money and getting attention. AND, he is quite skillful in all of the above.

Show me a man who speaks with power and conviction about an issue, ANY issue...and who profits financially from his "wisdom" and charisma...and I will show you a charlatan. Ideology be damned.

The issue, as always, is greed. Avarice in its myriad manifestations: accumulation, accolades, attention, aggrandizement...and those are just the A's!

Until greed is truly replaced by humility and a genuine quest to end poverty, the world will continue to spiral downward.

A Walk in the Woods said...

The Stock Market should be referred to as The Rigged Market, as in Max K's subtitle for his website which says, "Rigged Market Capitalism"

I think there is more than a pasting understanding of the nature of the equities market's 'integrity' around TAE.

To distill, the Banking Vampire Maggots of Wall St, being gambling addicts, went down to the race track and lost ALL of their 'equity', then ALL of your 'equity' on bad bets. To cover up this fact, they bought the US government, lock, stock and barrel, and put into play a scheme to transfer their private obsessive gambling debts to the Public.

In the course the largest financial scam in human history, they exchanged toxic gambling garbage from Wall St, for taxpayer backed Faux Fed Fiat and just went out immediately and gambled with it, on 'The Stock Market'.

This made 'The Stock Market' appear to the lumpen-proletariat, who had "equity' in it, like it was still imbued with Life, instead of appearing like the rotting corpse that it really was, hence the "Rigged Market Capitalism" brand name.

So after the 'equity' market was sent to a deluxe mortician spa and bluffed up to an almost life-like sheen with High Frequency Trading, the Banking Vampire Maggots just hollowed out the cadaver on Wall St, formerly known as 'The Stock Market', and are set to move on to the greener pastures of pension funds, the Social Security Trust Fund, stuff like that. They will never stop, they are the Undead. They have bottomless appetites.

They also took taxpayer failout/bailout money to gamble in the commodities markets. This is where the sky is the limit. Any commodity is a target for their bubble machine. Pump up a commodity, any commodity, with Faux Fed Fiat, suck investors in, pull the rug out from underneath them at the peak of speculative frenzy, eat their brains, works every time.

Max K is fond of saying you have to have capital to have Capitalism.

There's damn little capital left in the bottom 90% of the country.

Not much left for the Banking Vampire Maggots to feast on, except each other.

p01 said...

RE: Glenn Beck

Glenn Beck - The Lone Voice Of Reason In An Age Of Hysteria:,18612/

Hold yer horses, it's from The Onion :) Who sais TEOTWAWKI cannot be fun?


logout said...

"Moreover, that would also mean that we've had bigtime inflation over the past two years (see the graph). I see no-one acknowledging that, though."

That of course should have read "Deflation".

Despite that 2 years of deflation most of the nominal prices of things that are of major concern to Joe public have risen ie. food clothing, energy etc. The main exception I see has been in housing prices and there Joe is either tossed out on the street loosing all equity or else has suffered a great loss. Are there other areas that deflation has expressed itself as a fall in price?

On another item, in Stoneleigh's refutation of John Williams Inflation stance, she says:

"Debt-junkie governments will be caught in a liquidity trap until the power of the international debt financing model is finally broken, as it will eventually be.

Would you expand on that, that is, make plain the mechanism or actual process behind that breaking of the model, as I may have missed something in the reading and be looking at how that would come about quite differently than she means.


Dan said...


RE: "Banking Vampire Maggots"

I would assert that you and I are no different from these men.

If we, like Biff Tannen (from "Back To The Future" Part II), KNEW the outcome of the bets (Because in rigged-Capitalism, bad bets NEVER happen. Either the government uses taxpayer money to pay off the bad bets, or gambling in derivatives and CDS covers bad bets with more ill-gotten gain.)

If we KNEW that we would win...we would be just as greedy and gluttonous as the Banking Vampire Maggots.

The issue is NOT, and never has been, about Wall Street and the Banking Vampire Maggots. It is about us. It is about our unwillingness to look greed in the face, and to reject it, wholesale.

At the risk of sounding too self-righteous...I challenge anyone reading this blog to honestly state that they consider themselves immune from the mind-states that drive the Banking Vampire Maggots to do what they do.

Hombre said...

Dan 10:39 - I have this take on "banker maggots" (as termed above) and regular folks.
I am not into a blame game.
We are all caught up in the culture which has evolved, and obviously we have participated in manifold ways. It is flawed, and being human we have greatly overestimated both the "progress" we have made and the future we envisioned. And certainly we all have played a part.
Of late, a few years let's say, the corruption inherent in the system has become apparent to ever greater numbers of folks, but not yet the majority by any means.
But for a long time anyone at the UPPER LEVELS of finance and corporate management HAVE KNOWN! These folks aren't into other occupations and preoccupations, IT IS THEIR JOB TO KNOW!
They know and utilize all manner of phoney and virtual financial tools based on thin air and without basis in any standard, commodity, or even reality. These virtual instruments enrich the elite and indebt the citizenry.
So yes, I think there are a great many at the top, especially in the financial and corporate complex, who have by their actions created a monster much greater than you or I could ever have made.

Still... “You can't blame gravity for falling in love.”
--Albert Einstein

Dan said...

@ Hombre

"...So yes, I think there are a great many at the top, especially in the financial and corporate complex, who have by their actions created a monster much greater than you or I could ever have made..."

Agreed, by virtue of their power and station. But the mind-state that drives their nefarious and amoral actions exists in you and I as well, and we must make a conscious effort, in each moment of our lives, to reject falling prey to the call of avarice.

Ilargi said...

New post up.

The Debt-Dollar Discipline: Part III - Future Reorganization